Everyone was excited about the continuing, much hoped-for, Santa Rally!
Then, Santa slipped on the steps. Had a nasty fall. He has gathered himself and gotten back up, but nonetheless, just a little bit shaken.
We are seeing tremendous volatility as the year draws to a close. Creating a short-term trading environment unfortunately rich in landmines. This does of course regularly happen these days, but when we live in a period of hourly ranges that match what were once daily ranges, it is a high degree of difficulty environment indeed.
Long-term fund managers and traders, who have simply been buying for the long term are the winners of the moment. Their belief in the so-called Santa rally could prove to be a significant vulnerability, however. Santa is doing his best, but the roads and steps are very badly iced this year.
China winding down Covid restrictions
The out-there real-world reality continues to deteriorate alarmingly, even with a winding up of China’s Covid restrictions getting underway.
There is always a powerful momentum effect regarding any individual economy and certainly the global economy.
A turnaround in that momentum requires one of the big three — USA, China, and EU –holding the fort so to speak, and growing strongly regardless of the general global slowdown. We saw this very accurately in the Global Financial Crisis of 2008/2009 when China maintained strong economic growth providing an impressive anchor to capitalism globally to recover.
This time around, none of the big three are looking particularly bright. Near term, markets have at least momentarily, decided to ignore/compartmentalise the war in Ukraine, and to see declining economic data in the USA as encouraging news of the hope of Fed rate hike relief. While seeing reduced Covid interventions as some kind of panacea for China.
On the US interest rate expectations front, I continue to warn the endpoint is most certainly in the 5.75% to 6.5% range, and can even strike onwards to as high as 7.5%.
It is nothing short of amusing, just how short a memory US financial market sentiment has had this year.
We constantly go through these absurd cycles of the Fed clearly telling the market that they want a weaker economy and will continue to raise rates anyway, and within a day or two, the market starts thinking all over again, that bad data could mean the Fed stops.
The Fed is not stopping. The market needs to get that in its head.
The Fed will be hiking much higher than the market has priced, and the economy will plummet much lower than the 2022 correction has so far priced.
If, we go into the end of 2022 recognising that the market is getting long on mistaken beliefs about a resumption of previous levels of Chinese growth, a resolution of the Ukraine War, that the Fed will pause or pivot and the economy is still strong? Then, the market has again set itself up for another significant fall in the first half of 2023. Likely in the order of 20% again.
The market is not as ridiculously overly bullish or positioned as it was going into the start of 2023, but there is also the increasing acceptance of many investors that the real Main Street risks continue to grow. This can lead to redemptions. Regardless, of how good the funds’ management industry spin masters are?
Hence, Yes, we could see another 20% decline from current levels during 2022.
It is a race against time, to see how high he can climb before he and all the presents are blown to the wind.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
